I haven’t done a Lending Club review since May. Before that, it was a full year since my last one. Back in May, I had an Adjusted Net Annualized Return of 7.18% which was up from 7.02% the year before. Here’s where things stand now:

Lending Club Performance (September 2015)

As you can see it’s up above 7.50% (barely, but I’ll take it).

It’s a good move in such a short time. I’m not entirely sure what to attribute the move to, but I have been using Lending Club’s automatic investing feature. I let them pick my loans on criteria that I choose. My criteria is extremely simple: loans that are grade D or lower with credit scores above 700. I’m sure that this isn’t the most efficient criteria, but it does the job.

It tends to keep payments from other loans reinvested… except that every now and then I log in and see that I have a bunch of money available cash. For example, in the image above I have $100 just sitting there waiting for loans. I was able to find more than enough qualifying loans available. I’m not sure what’s up, but I’m guessing it’s human error on my part (I’m missing some tiny detail). In any case, the “set it and forget it” method has worked reasonably well.

There’s another detail in the image above that may be easy to overlook. I’ve received $12,500+ in payments over the years in Lending Club. I sometimes here that it’s risky because P2P lending is new, but my loans have now rolled over a couple of times. With more than 200 active loans, it’s got some good diversification. The poop may hit the fan with the economy and change all this, but it hasn’t happened yet. And if the economy takes a big hit as in that scenario, your stocks may lose even more.

I look at Lending Club as something that is differently correlated to my other investments (stocks, real estate), which is valuable to me. I would love to have more money in Lending Club, but saving in retirement accounts is about the most I can do at this point.

At the time, I had a “if everything was perfect” rate of return of 8.10%. Using the more likely, “average amount of defaults” my rate of return was expected to be 7.02%

Today, not much has changed.

Lending Club May 2015 Performance (Click for larger version)

The high/”perfect” rate of return is 7.83%. The likely/”average” rate of return is 7.18% (pictured above).

It looks safe to say that I’m getting a 7%+ return in Lending Club. I think that’s great considering interest rates elsewhere and the consistency I’ve seen in the account over the years. Investing in the stock market can have some wild swings, but the growth in my Lending Club account is slow and steady. The 200 loans I have seems to eliminate the ups and downs. Don’t believe me? Here are many of the reviews of my Lending Club account over the years.

Years of data, consistent gains, a generous 7% return… I think these things could be valuable in any portfolio.

Fortunately it’s easy enough to get a fairly good range. In fact, Lending Club gives us tools to do exactly that. The image below shows that I am earning an annualized 8.10%. It presumes all those late people are going to suddenly start paying. While that’s an unlikely scenario, it is a good upper bound.

(Click for larger image)

Using Lending Clubs tool, I presumed all the late people will default. While the worst case scenario is that the people with current loans default, this is a reasonably very, very bad scenario. The result of this assumption would be an annualized return of 7.02%.

Lending Club has a lot of data of what default rates are, and they give you this information so you can predict what might be a most likely scenario. Using those numbers, my return would be 7.61%.

I have more than 200 active loans and I’ve been lending for years now. (The 478 number that you see in the image above includes loans that have been fully paid off and defaulted ones that were charged off). This large number of loans over a long time gives me a high degree of confidence in the returns. In fact, I am more confident in Lending Club returns than I am in any of my diversified ETFs. I certainly couldn’t tell you that the S&P 500 is likely to return between 7-8% this year. In fact, I would confidently bet on it returning some amount outside that range.

On one hand, I have stocks that could gain 20% or lose 10%. On the other hand, I have Lending Club that has shown over years that it returns 7% or more. Finally, on my third hand (you don’t have three hands?), I have:

CDs guaranteeing around 2.3% annually over 5 years.

It all depends on what your risk/reward tolerance is, but I think a strong case can be made for investing in Lending Club to smooth out the stock market’s wild ride while providing you better interest (without much more risk) than CDs.

Yesterday, I wrote about how annuities can be confusing, especially with hidden fees. I was wondering if it was possible for me to create something that approaches an annuity without the complexity and hidden fees, using investment vehicles that I know and understand.

I’m going to start with two important disclosures before I dig in:

Annuities give you a guaranteed income stream. This is not going be guaranteed. The investment vehicles in some cases can lose value. The idea is that by diversifying amongst a few different option, you minimize that risk. And while annuities do give you guaranteed income, let’s not forget the case yesterday of the annuity that charged more in fees than it paid out. I’d consider that a risk as well.

At age 37, I’m focused on growth not earning an income off my investments. For those reasons, I haven’t fully researched all the options available. Please be kind and helpful in the comments, okay?

For sake of argument, let’s assume that you had a million dollars burning a hole in your pocket. (Just your typical scenario, right?) You are thinking, “I’d really like to put this money to work to earn me $40,000 a year.” (See what I did there with the Rule of 4%?) How am I going to get there?”

Well, I’ve got three options for you to think about. I would suggesting allocating your money amongst all three.

Laddered CDs – That link gives some CDs that are paying around 1.3% interest. If you put your whole million there, you’d only get $13,000 to live off of. That’s not a lot, but at least it is guaranteed.

Dividend Paying Mutual Funds and ETFs – I honestly had a little trouble finding documentation of the yield on a lot of mutual funds and ETFs, but I found this ETF tracker that has the top 100 yielding ETFs. I’d stick with something relatively safe that I’ve heard of like Barclays SPDRs which seem to have some options in the 5-6% range. Obviously this is the farthest thing from guaranteed, but at least the ETFs are diversified.

Lending Club – I’ve written before that I’m getting a 7% interest rate at Lending Club and it seems like most people are doing better than me. Some people will say that Lending Club is too risky because it hasn’t been around very long. You are relatively protected if they go out of business. Also a significant investment allows you to diversifying amongst thousands of loans, making it fairly protected (though if the entire economy goes Mad Max on us, they probably won’t pay). Finally, there are institutional investors putting big money in Lending Club. It isn’t as absurd as it sounds to do the same.

If you were to mix the three options equally, you could get around a 4.6% return. On that million dollars, you’d have $46,000 in income. As for fees, they are fairly transparent. Most CDs don’t have fees unless you withdraw the money early. The ETF that you choose will have an expense ratio that will disclose the fee. Finally the Lending Club servicing fees are outlined on the website. You aren’t going to get in a situation where some hidden fee is going to sap your million dollars.

Let me know what you think in the comments. What else should/could be included in here? Treasury bonds?

It occurred to me that it has been some time since I’ve updated people on my Lending Club lending. I’ve been Lending Club for years and years now… and typing that sentence makes me feel really old.

A friend of mine was asking me if lending money on Lending Club is really worth it. I decided to back and dig into my previous updates to give her a quick snapshot of how it has worked for me. The obvious caveat is that someone else’s performance will be different, but my performance is actually a little below the norm according to Lending Club. Anyway, I sent her a couple of years worth of data and posts that I’ve written:

So that $3045.10 of account value in May of 2011 is now nearly $3800! I’ve added no new money, just reinvested the payments of previous loans and let it snowball. That’s around ~$750 on $3045 of principle in about 39 months. (Look at me getting all mathy). I found a calculator online and that rate of return comes out to about 6.75%. That’s different than the amount that Lending Club shows in the image, but their calculation is over the entire time I’ve had the account (and is undoubtedly more complex).

In a world where banks are paying fractions of a percent, this is much better. (Especially when they pound their chests at giving “three times the nation average”, which amounts to fractions of a percentage point.) Of course, this there’s risk with Lending Club and it isn’t like a bank account at all. I think that risk is minimal since I’ve had 456 notes, a significant sample size by almost any measure.

The thing that I like most about Lending Club is that I can see myself using my Lending Club account as a source of income in 30 years when I’m 67. Doing the math and compounding this interest, it will be $21,289 at that point. The cost of living will be more… and it’s not like $21,289 will sustain me for years, but it’s enough to take $200 a month out for years. That will hopefully cover some bills, which isn’t bad considering that I just put money in once.

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